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European and American Approaches to Antitrust Remedies and the Institutional Design of Regulation in Telecommunications

This paper presents a perspective on remedies in network industries that is informed by American and European experiences with antitrust law and sector-specific regulation. In the United States and the European Union, the topic of remedies in network industries cuts across antitrust law and sector-specific regulation, including telecommunications. The legal and economic understandings of a remedy are not always synonymous. In both legal systems, a remedy is the corrective measure that a court or an administrative agency orders following a finding that one or several companies had either engaged in an illegal abuse of market power (monopolization in the US and abuse of dominance in the EC) or are about to create market power (in the case of mergers). With the exception of merger control where remedies seek to prevent a situation from occurring, legal remedies are retrospective in their orientation. They seek to right some past wrong. They may do so through the payment of money (whether that is characterized as the payment of damages, fines, or something else). Or they may seek to do so through a mandated change in market structure (structural remedies), as in the case of divestiture, or in the imposition of affirmative or negative duties (behavioral remedies).

The economic meaning of a remedy emphasizes market failure. The market failure may result from the unchecked exercise of market power, or from the uncompensated generation of an external cost or benefit, or from an insufficiency of information with which to make efficient choices concerning consumption, production, or investment. Whereas lawyers think of a remedy as what to do after a finding of illegal conduct, economists think of a remedy as what to do after a finding of market failure. The two approaches overlap perfectly if legislators and courts make liability rules that are triggered only after a finding of market failure.

The difference between the legal and economic conceptions of remedy highlights another important distinction, namely, the difference between ex ante and ex post interventions in the market. Under the ex post approach, a remedy is imposed if and only if an illegal conduct is first proven. And it is the government or a private plaintiff that bears the burden of proving their case. This arrangement describes the operation of monopolization law under the US Sherman Act or the concept of abuse of a dominant position in the EU.

Ex ante remedies are generally imposed through sector-specific regulation, though such remedies may also be imposed on the basis of antitrust rules. This is, for instance, the case where remedies are imposed as a condition for clearance of a merger between telecommunications operators. In both the US and the EU, antitrust enforcement authorities have used merger control procedures as a way to extract significant concessions from the merging entities. As far as institutional design is concerned, remedies in network industries can thus come from two main sources: ex ante or ex post enforcement, and/or sector-specific regulation.

Against this background, this paper seeks to explore the issues of remedies and institutional design of regulation in a comparative manner by reference to US and EU law. Part 2 analyzes the US model and Part 3 the EU model. Part 4 contains a conclusion.

Section 2.1 provides illustrations of ex ante and ex post remedies in American telecommunications. As will be seen, the reliance on antitrust consent decrees makes the border between ex ante and ex post remedies thin as such decrees can be seen as an amalgam between the ex ante and the ex post approaches. Section 2.2 argues that, over the last two decades, antitrust law has evolved into another form of regulation as it now relies on numerous policy statements and guidelines that resemble the type of prospective rulings made by regulatory agencies. Section 2.3 outlines the risk that the approach followed by the FCC in its Local Competition Order and recently vindicated by the Supreme Court in the Verizon case could affect the development of antitrust-based remedies in network industries. Finally, Section 2.4 argues that, by attempting to impose the TELRIC model to US trading partners, the US Trade Representative has turned itself into a telecommunications regulator. We also argue that this process lacks legitimacy and could have an unintended boomerang effect on US telecommunications operators.

Twenty years ago, it was clearly the case that its embrace of economic analysis made antitrust law intellectually dominant over industry-specific regulation in the United States. The diffusion of ideas flowed from antitrust to the regulatory agencies. Then something happened, and the direction of policy innovation reversed. Today, American antitrust law and its notions of feasible remedies in network industries are influenced by the theories of market failure predicated on network effects.

So it is now natural to ask, How will the Supreme Court's 2002 Verizon decision on TELRIC pricing affect the development of antitrust law concerning Microsoft? The influence may prove to be substantial. There is an obvious relationship between an ex ante regulation requiring unbundling of network elements and an ex post antitrust rule penalizing the failure to offer a product or functionality on an unbundled basis. The latter is the antitrust doctrine concerning tying arrangements, which was so contentious in the Microsoft case. When read together, Verizon and Microsoft have potentially broad implications for antitrust remedies relating to bundling and unbundling of products having substantial sunk costs and network complementarities. In the intellectual property area, we can expect to see more monopoly-preservation tying cases, relying on David Sibley's theory of partial substitutes, employed in the Microsoft case. These cases will immerse the litigants and the courts in TELRIC-like questions of the pricing of the tying product on an unbundled basis.

Section 3.1 explores ex ante and ex post remedies in telecommunications in the European Union. As in the US, we will see that the border between ex ante and ex post remedies is thin and that some remedies appear as an amalgam between these two kinds of remedies. Section 3.2 argues that, as in the US, EC antitrust law has taken a regulatory tone with the multiplication of notices and guidelines, which resemble the prospective rulings made by regulatory agencies. Section 3.3 shows that antitrust concepts and principles play a central role in the new EC framework on electronic communications. Finally, Section 3.4 observes that, unlike the US Trade Representative, DG Trade does not behave like a telecommunications regulator. However, the enlargement process allows the EC to progressively expand the number of nations to which its regulatory principles in the area of telecommunications and in other network industries will apply.

There are several similarities in the approaches followed by the US and the EC in their remedial efforts. First, the US and the EC have relied on a combination of ex ante and ex post remedies to control market power in the telecommunications. Yet, both regimes have also developed hybrid remedies, which represent an amalgam between the ex ante and the ex post approaches. For instance, as illustrated by the MFJ, consent decrees have been used by the Antitrust Division as a way to regulate the telecommunications sector. In both US and EC, the remedies imposed as a condition for merger clearance often take the form of long lists of behavioural requirements, which can be hardly distinguished from prospective regulatory requirements. Although we agree that antitrust rules be used to maintain a competitive market structure, we question the use of antitrust remedies to reshape the telecommunications sector or achieve specific regulatory objectives. Very often, operators are under no position to negotiate, and the clearance process turns into a game of regulatory extortion.

Second, the growing amalgam between antitrust and regulation can also be illustrated by the increasing reliance by antitrust authorities on guidelines, policy statements, notices, and other tools containing abstract statements of the way these authorities plan to address anti-competitive conduct, which may arise in the future. In this context, they very much act like a bureaucracy adopting prospective rulings than as antitrust authorities deciding cases on the basis of past events. In the future, antitrust could be much less of a litigation practice, than a regulatory compliance exercise whereby adepts go through checklists of predetermined regulatory interpretations.

There are also significant differences between the US and EC regimes of remedies in telecommunications. First, regulatory remedies have generally been more intrusive in the US than in the EC. The combination of the 1996 Telecommunications Act and the FCC's implementing orders has produced an extremely dense regulatory framework regulating certain categories of operators' behaviours in the most excruciating detail. Although the EC regulatory framework adopted in the EC in the 1990s was also heavy-handed, the new regulatory framework has clear deregulatory features, as it relies on a market-by-market system of sunset clauses and allows regulation only when antitrust law remedies are not sufficient to address the identified market failure(s). The new EC regulatory framework no longer imposes remedies on predetermined categories of operators, but on operators holding SMP, this latter concept corresponding to the notion of dominance under EC competition law. The EC system seems thus better equipped to limit the imposition of ex ante remedies to circumstances where market failures can be identified. No other circumstance should warrant ex ante regulatory intervention.

Second, in recent years, antitrust rules have played a greater role in the EC than in the US in telecommunications. Although the US government has not initiated any major telecommunications antitrust lawsuit since the MFJ, the European Commission has launched proceedings to address a variety of anticompetitive behaviours in telecommunications. Moreover, although it is true that US antitrust increasingly takes a regulatory tone, antitrust principles have not much penetrated sector-specific regulation. On the contrary, there is a risk that regulatory models developed by the FCC (such as the controversial TELRIC pricing methodology) could influence the design of antitrust remedies in the future. By contrast, EC antitrust principles play a crucial role in the new regulatory framework on electronic communications: key regulatory decisions, such as market definition, identification of SMP operators, and the adoption of remedies must be adopted in conformity with antitrust principles. There is also a clear understanding in the EC that sector-specific regulation is to progressively give way to antitrust law.